Fail whale – Zynga’s over-reliance on broken business

Zynga quietly laid off 5% of its staff during Apple’s conference yesterday, reminding us yet again that social gaming on the mega-publisher scale has the long term prospects of a terminally ill mayfly.

Zynga has been doing remarkable things for almost a year, folding slowly in on itself like every souffle I’ve ever attempted to souff, becoming denser and less delicious as the glorious towering structure turned out, inevitably, to be composed almost entirely of hot air.

It’s official. Zynga Boston has been closed; its Austin and Chicago offices have been hit with heavy lay-offs; its Japanese and UK studios have their heads poised over the headsman’s block. Thirteen games are to be “sunsetted”. Zynga is in trouble.

Not to hipster at you, but this shouldn’t have come as a surprise to anyone. Even if you never look at the stock market or financial reports, we have two special header images we use for whether news is, from Zynga’s perspective, good or bad; QQ dog has been getting quite a work out recently. I don’t think anyone has ever noticed this. I don’t think many of you read the Zynga stories. Zynga, it seems, is boring – until it does something remarkable, like issue mass lay-offs.

The thing is, Zynga has been doing remarkable things for almost a year, folding slowly in on itself like every souffle I’ve ever attempted to souff, becoming denser and less delicious as the glorious towering structure turned out, inevitably, to be composed almost entirely of hot air.

There was a time when so many million users had a direct equivalent in revenue. It was quite a long time ago; ever since the Internet really started getting warmed up in the late 1990’s, the value of so many bums on seats (eyes on pages; clicks on hyperlinks) has become incredibly hazy. But the lag is tremendous and somehow, people with so much money that they can’t think of anything to do with it but make more looked at Zynga’s admittedly phenomenal user and attach rates and thought, “that’s for me. Social gaming will finally allow me to purchase another beach house.”

The key issue is that social gaming’s business model is incredibly risky business. Years of free entertainment have taught social gamers that they don’t need to pay for games. Sure, those microtransactions look tempting, but even as you find yourself routinely checking your broccoli fields, you know you don’t care enough to spend $2 to get a leg up – and if the game pushes you to, you’re likely to feel scammed, and perhaps quit and never look back.

Whales buy everything available. I don’t understand it. You don’t understand it. Zynga probably doesn’t understand it – but it does everything it can to capitalise on it. Even so, it’s not a sustainable business model – casting your nets to miss literally millions of little fishies on the odd chance an overblown Cetacean.

Social gaming is dependent on “whales” – those who don’t make that decision. Whales buy everything available; it’s no exaggeration to say that some people spend thousands of dollars a year on Facebook games. They really do. I don’t understand it. You don’t understand it. Zynga probably doesn’t understand it – but it does everything it can to capitalise on it. Even so, it’s not a sustainable business model – casting your nets to miss literally millions of little fishies on the odd chance of an overblown Cetacean – and as analysts pointed this out again and again, the investment money pouring into social gaming began to dry up, even as it continually failed to trickle out the other end. Social gaming can turn a profit, it’s true; but it’s no Google.

To be fair to Zynga, it saw this coming. Although it continued to develop social games – notably doubling down on historically successful properties like Farmville and Mafia Wars – it’s taken steps to diversify. It wants to get its games off Facebook and establish itself as a gaming destination brand on Zynga.com. Not only would this free Zynga from Facebook’s various design restrictions, the slice of profits currently pocketed by Zuckerburg and co would instead litter the social publisher’s pockets, and it would take its own cut from third-parties like Konami. It also invested heavily in mobile and what it calls “mid-core“, eating into its own profit opportunity so as to have options in the future.

Investors haven’t appreciated these tactics, as sensible as they seem; perhaps they failed to realise what it seems Zynga knew as well as anyone else – that the social gaming bubble was going to burst. We call it a bubble because when it suddenly blows it leaves nothing behind except, perhaps, a painful speck of detergent in an observer’s eye, but really, social gaming’s decline has been more like a drunken stumble. Here we are the bar, flush in the pocket and energised, and as the hours progress, the money vanishes; our hand eye co-ordination goes; and nobody’s surprised when the stool tips over and our wastrel body is left snoring on the sticky floor.

The best Zynga can hope for now is that more sober bystanders don’t tread on it so it can climb back to its feet with a hangover; for the sake of all those whose financial security is dependent on Mark Pincus’s success, swallow your sneers and wish it well.

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